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Inflation hits property catastrophe reinsurance renewals

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reinsurance

Updated to reflect the June 7 announcement by Axis Capital that it is withdrawing from the property reinsurance market.

Concerns over inflation and reduced property catastrophe capacity made June 1 reinsurance renewals difficult and protracted, with many ceding insurers facing double-digit rate increases, sources said.

“For Florida, we would expect the rate increases to be easily 30% or higher for those that are able to get deals done,” said Brian Schneider, a Chicago-based senior director in Fitch Ratings Inc.’s U.S. insurance group.

The increase in inflation was a major factor in renewal discussions, sources said.

“Probably the biggest topic of conversation in the reinsurance market this year is how people are looking to handle inflationary factors,” said Adam Schwebach, Tampa, Florida-based executive vice president and branch manager for Gallagher Re, the reinsurance brokerage unit of Arthur J. Gallagher & Co.

The Florida reinsurance market is the hardest since perhaps 2007, he said.

Rebuilding costs and home values are rising, Mr. Schwebach said. “Everybody is taking a hard look at what is being added to property values year on year so reinsurers can be comfortable with valuations and limits.”

Capacity was also an issue as some reinsurers retreated from the catastrophe reinsurance market. For example, on June 7 Axis Capital Holdings Ltd. announced it was exiting the property reinsurance market. The move followed an earlier announcement by the insurer and reinsurer that it cut its property catastrophe reinsurance business by 27% at April 1 reinsurance renewals, which followed a 45% reduction in its property catastrophe reinsurance book at Jan. 1 renewals.

“We’ve certainly seen less capacity being offered out there and the capacity that is being offered is being more selective,” Mr. Schneider said.

In RenaissanceRe Holdings Ltd.’s first-quarter earnings call on May 4, CEO Kevin O’Donnell said the reinsurer has steadily reduced its exposure in Florida. “With respect to Florida, even with these rate increases, we are unlikely to increase offered limits at the June 1 renewal,” he said. “Over the last several years, we have steadily reduced our exposure to the Florida domestic homeowners market and it now represents about 2.5% of our gross written premium.”

“The strategy is to reduce as much volatility as they can,” Christopher Grimes, a Chicago-based director at Fitch, said of reinsurers’ moves away from Florida property catastrophe business.

While there are some newer reinsurers in the market, such as Bermuda-based Convex Ltd., founded in 2019 by industry veteran Stephen Catlin, “Their size isn’t that big compared to the rest of the market,” Mr. Grimes said, adding that even such new players are being very selective in their deployment of limits.

Another factor in the June 1 renewals was a scarcity of capacity in retrocessional markets, where reinsurers sometimes transfer risk off their own books.

“Now, there is not a lot of space in the retro market, so there’s not a lot of space to pass on that risk,” Mr. Schneider said.

In a twist for this renewal cycle, on May 26 Florida Gov. Ron DeSantis signed property insurance reform legislation that among other things established the $2 billion Reinsurance to Assist Policy program allocating capital to reinsurance for insurers willing to give their policyholders premium relief, essentially creating new reinsurance market capacity.